Danone/Wahaha: Dispute Resolution in China (Part 4)

When two parties to a joint venture in China are at odds, the question is, “What is the best way to resolve the dispute?” Unlike in the West, where initiating a lawsuit can be a good tactic for bringing an adversary to the negotiating table, this usually has the opposite effect in China. Danone’s legal actions are now triggering an angry and widespread legal attack against the company and its officers by its joint venture partner, underscoring once again why pursuing a legal strategy should always be a last resort in China. Not only is it unlikely to solve the problem, but it stands a good chance of making a bad situation even worse.

While there are laws on the books and arbitration panels in China to settle disputes between Chinese and foreign partners, the problem lies in enforcement. Winning an arbitral award can be a pyrrhic victory, as I have learned through painful experience. Enforcement of any such award will revert to the local courts, where home court advantage is the order of the day. If
you have it, great. If you don’t, “good luck!”

Danone has filed lawsuits in California against two of Wahaha’s offshore companies, alleging that their subsidiaries in China are selling products which are the same as those being sold by the Wahaha joint ventures. It has also initiated arbitration proceedings in Stockholm. Joint venture contracts in China typically contain provisions which designate the jurisdiction where disputes between the partners may be settled. Presumably, Stockholm was identified as
such in the Danone/Wahaha contract. While it may be more comforting for a foreign partner to seek arbitration outside China, it is not always necessary. We have found arbitration in Beijing, for example, to be relatively fair.

Wherever the arbitration is held or the lawsuits are filed, any findings or arbitral awards in favor of Danone will need to be enforced by the court in Hangzhou, the city where both the joint venture and the Chinese partner are located. (Of course, there may be an advantage to filing a lawsuit outside China if there are assets which can be seized.) In Hangzhou, Zong is likely to have a great deal of influence. In fact, Zong himself has filed for arbitration there.

Apart from the difficulty of enforcement, pursuing a legal strategy in China should be the path of last resort for several other reasons. Legal proceedings take a long time and can be costly. Even in the most cut and dry cases, arbitrations can take at least one year. Meanwhile, as the partners argue their respective legal positions, the outcome is uncertain and the joint venture is most likely in turmoil. Also, once a case lands in the legal system, government officials, who may be otherwise disposed to help settle matters, will not get involved. They will instead be inclined to let the courts or the arbitration panel do their work.

Settling Disputes in China

What measures can a company take to resolve disputes with its Chinese partner? First and foremost, all efforts to settle differences through negotiations should be exhausted before taking legal action. In China, this is always the best way and has the advantage of keeping all other avenues open.

Secondly, the local governments can be very helpful in cases like this. If the joint venture has operations in its city, the local government has a vested interest in getting both parties to the negotiating table. A healthy, growing and profitable joint venture is good for the employees and for the city. In the case of Danone/Wahaha, the city of Hangzhou is also a significant shareholder in the joint venture. Whatever its relationship with Zong, Hangzhou has a couple of good reasons to bring about a successful resolution, including demonstrating to other foreign companies that the city is a good and fair place to do business.

Finally, a company should be creative about enlisting the support of other government and non-government entities. Short of writing articles (which sometimes only serve to further inflame), for example, the local press can be helpful. The fact that a reporter is even investigating a case may apply just enough pressure to bring about a peaceful conclusion. Face is important in China, and if both parties can settle peacefully without losing it, the chances for an amicable resolution increase significantly.

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